NP 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Approval of mutual fund merger -- approval required because merger does not meet the criteria for pre-approval -- differences in investment objectives -- merger not a "qualifying exchange" or a tax-deferred transaction under the Income Tax Act -- current simplified prospectus and financial statements of continuing fund not required to be sent to unitholders of the terminating fund in connection with the current merger and future mergers provided a tailored simplified prospectus is sent and the information circular sent for unitholder meeting clearly discloses the various ways unitholders can access the financial statements.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, ss. 5.5(1)(b), 5.6.
March 19, 2009
IN THE MATTER OF
THE SECURITIES LEGISLATION OF
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
IN THE MATTER OF
CAPITAL INTERNATIONAL ASSET MANAGEMENT
(CANADA), INC. (the Filer or Capital International)
CAPITAL INTERNATIONAL -- GLOBAL SMALL CAP
(the Terminating Fund)
The principal regulator in the Jurisdiction has received an application from the Filer on behalf of the Terminating Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for:
(a) approval of the merger (the Merger) of the Terminating Fund into Capital International -- Global Equity (the Continuing Fund) (together with the Terminating Fund, the Funds) under subsection 5.5(1)(b) of National Instrument 81-102 Mutual Funds (NI 81-102); and
(b) relief from the simplified prospectus and financial statements delivery requirements contained in subsection 5.6(1)(f)(ii) of NI 81-102 in respect of:
(i) the Merger; and
(ii) all future mergers of mutual funds managed by the Filer
(collectively, the Requested Relief).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator (Principal Regulator) for this application, and
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Northwest Territories, Nunavut and Yukon.
Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.
This decision is based on the following facts represented by the Filer:
1. The Filer is a corporation incorporated under the laws of the Province of Ontario, with its head office located at 181 Bay Street, Suite 3730, Brookfield Place in Toronto, Ontario. The Filer is registered as an adviser in the category of Investment Counsel and Portfolio Manager under the Securities Act (Ontario). The Filer is also registered as a Portfolio Manager (Securities) under the Securities Act (British Columbia) and as an Unrestricted Practice Advisor under the Securities Act (Quebec).
2. The Filer is the manager, trustee and promoter of the Funds.
3. Each of the Funds is an open-end mutual fund trust governed by a Master Declaration of Trust dated December 1, 2000, as amended on October 4, 2002, October 28, 2003, March 10, 2006, April 2, 2007, June 7, 2007, March 11, 2008 and June 11, 2008.
4. Units of the Funds are currently offered for sale under a simplified prospectus and annual information form dated June 11, 2008, as amended, in all of the provinces and territories of Canada. A pro forma simplified prospectus and annual information form will be filed in May 2009 to provide for the continued distribution of the units of the Continuing Fund.
5. In the event that the Merger is not approved and implemented, the Filer (as manager of the Terminating Fund) intends to terminate the Terminating Fund on or about April 20, 2009. In the circumstances, purchase and switch transactions into the Terminating Fund, other than pursuant to automatic investment plans, were suspended on January 30, 2009 and units of the Terminating Fund will not be renewed for distribution following expiry of the simplified prospectus lapse date on June 11, 2009.
6. The Funds are reporting issuers under the applicable securities legislation of each province and territory of Canada and are not on the list of defaulting reporting issuers maintained under such securities legislation.
7. Each of the Funds follows the standard investment restrictions and practices established by the securities regulatory authorities in each province and territory of Canada.
8. The net asset value (NAV) for each series of units of each Fund is calculated as at 4:00 p.m. Eastern Time on each day that the Toronto Stock Exchange is open for trading.
9. The Capital International Management Committee, on behalf of the board of directors of Capital International approved the Merger on January 26, 2009 of the Terminating Fund into the Continuing Fund and a press release and material change report in respect of the Merger were filed on SEDAR in January and February 2009, respectively.
10. As required by National Instrument 81-107 -- Independent Review Committee for Investment Funds, the Manager presented the terms of the Merger to the Independent Review Committee (IRC) for its review. The IRC gave the Filer a positive recommendation for the proposed merger advising that, after reasonable inquiry, it has concluded that this will achieve a fair and reasonable result for the Terminating Fund's unitholders.
11. Unitholders of the Terminating Fund will continue to have the right to redeem or transfer their units of the Terminating Fund at any time up to the close of business on the business day prior to the effective date of the Merger.
12. Approval of the Principal Regulator for the Merger is required because the Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers as set out in section 5.6 of NI 81-102 because the fundamental investment objective of the Terminating Fund is not substantially similar to the fundamental investment objective of the Continuing Fund, the Merger is not a tax deferred transaction as described in subsection 5.6(1)(b) of NI 81-102, and the current simplified prospectus and the most recent annual and interim financial statements for the Continuing Fund will not be sent to unitholders of the Terminating Fund. Other than subsections 5.6(1)(a)(ii), 5.6(1)(b) and 5.6(1)(f)(ii) of NI 81-102, the Merger will comply with all other requirements for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.
13. A management information circular in connection with the Merger was mailed to unitholders of the Terminating Fund on or about March 9, 2009 and subsequently filed on SEDAR.
14. Unitholders of the Terminating Fund will be provided with information about the tax consequences of the Merger in the management information circular and will have an opportunity to consider this information prior to voting on the Merger.
15. The Filer will pay all costs and reasonable expenses relating to the solicitation of proxies and holding the unitholder meeting in connection with the Merger as well as the costs of implementing the Merger. The Filer will also pay the other costs of the Merger, including all brokerage costs following the date of the approval of the Merger (including expenses incurred in respect of any required sale of portfolio assets of the Terminating Fund) and regulatory fees.
16. The Filer will waive all deferred sales charges payable on redemptions of Series B units of the Terminating Fund occuring between January 29, 2009 and the date of the Merger. In addition, on the Merger date, unitholders of Series B units of the Terminating Fund will receive Series A units of identical value of the Continuing Fund.
17. Unitholders of the Terminating Fund will be asked to approve the Merger at a special meeting scheduled to be held on or about April 7, 2009. Implicit in the approval by unitholders of the Merger is the adoption by the Terminating Fund of the investment objective of the Continuing Fund.
18. In the event that the requisite approvals are obtained, it is anticipated that the Merger will be implemented on or about April 20, 2009. If unitholder approval is not received, the Terminating Fund will be terminated on or about April 20, 2009.
19. Following the Merger, the Continuing Fund will continue as a publicly offered open-end mutual fund and the Terminating Fund will be wound up as soon as reasonably practicable.
20. The Merger is conditional on the approval of the unitholders of the Terminating Fund and the Principal Regulator. If the necessary approvals are obtained, the following steps will be carried out to effect the Merger, which is proposed to occur on or about April 20, 2009 (the Merger Date):
(a) Prior to the date of the merger, the Terminating Fund will liquidate a substantial portion of its portfolio such that on the date of the merger, the Terminating Fund will hold mostly cash and a small amount of securities which, in the opinion of the investment advisor, are consistent with the investment objectives and strategies of the Continuing Fund;
(b) The Terminating Fund will subscribe for units of the Continuing Fund in exchange for its portfolio assets;
(c) The Continuing Fund will not assume the Terminating Fund's liabilities and the Terminating Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the date of the Merger;
(d) On the Merger Date, the Terminating Fund will distribute its net income and net realized capital gains for its current taxation year, to the extent necessary to eliminate its liability for tax;
(e) Immediately thereafter, the units of the Continuing Fund will be distributed to unitholders of the Terminating Fund on a dollar-for-dollar and series-by-series basis in exchange for their units in the Terminating Fund except that unitholders of Series B units of the Terminating Fund will receive Series A units of identical value of the Continuing Fund; and
(f) As soon as reasonably possible following the merger, the Terminating Fund will be wound up.
21. The Terminating Fund and the Continuing Fund are, and are expected to continue to be at all material times, mutual fund trusts under the Tax Act and, accordingly, units of both Funds are "qualified investments" under the Tax Act for registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered education savings plans, registered disability savings plans and tax-free savings accounts.
22. Subsection 5.6(1)(f) of NI 81-102 requires that certain materials be sent to unitholders of the Terminating Fund in connection with the approval that must be obtained from those unitholders for the Merger. Specifically, the following documents must be sent:
(a) an information circular that describes the Merger, the characteristics of the Continuing Fund and any income tax considerations;
(b) if not previously sent, the current simplified prospectus and the most recent annual and interim financial statements for the Continuing Fund; and
(c) a statement describing how unitholders may obtain the annual information form for the Continuing Fund.
23. The simplified prospectus for the Funds dated as of June 11, 2008 is the relevant simplified prospectus for the Continuing Fund (the Current Simplified Prospectus). The Current Simplified Prospectus qualifies several other funds in addition to the Continuing Fund, and only the Continuing Fund is relevant to the unitholders of the Terminating Fund in connection with the Merger.
24. In accordance with section 5.3 of National Instrument 81-106 Investment Fund Continuous Disclosure, it has been Capital International's practice to annually solicit instructions from existing investors in the Capital International funds to request delivery of such financial statements. Unitholders in the Capital International funds have the opportunity to request to receive such documents on an annual basis.
25. The Filer believes that the Merger will be beneficial to unitholders of the Terminating Fund for the following reasons:
(a) unitholders of the Terminating Fund may have the potential to enjoy increased economies of scale with respect to operating costs and administrative expenses as part of a larger continuing fund;
(b) the Merger will eliminate the administrative and regulatory costs of operating the Terminating Fund as a separate mutual fund;
(c) by merging the Terminating Fund instead of terminating it there will be a savings for the Terminating Fund in brokerage charges associated with the liquidation of the Terminating Fund's portfolio on a wind-up. The unitholders of the Terminating Fund will not be responsible for the costs associated with the Merger;
(d) there is the potential for more stable, improved performance of the Continuing Fund;
(e) there is a lower management expense ratio charged to investors in the Continuing Fund for each series as compared to the Terminating Fund; and
(f) the Merger will eliminate redundancy in the fund line-up for the Funds.
The Principal Regulator is satisfied that the decision meets the test set out in the Legislation for the Principal Regulator to make the decision.
The decision of the Principal Regulator under the Legislation is that the Requested Relief is granted provided that:
(a) in satisfaction of the simplified prospectus delivery requirement in subsection 5.6(1)(f)(ii) of NI 81-102, the Filer sends unitholders of a terminating fund a tailored simplified prospectus consisting of:
(i) the current Part A of the simplified prospectus of the applicable continuing fund, and
(ii) the current Part B of the simplified prospectus of the applicable continuing fund;
(b) the management information circular sent to unitholders in connection with a merger prominently discloses that unitholders can obtain the most recent interim and annual financial statements of the applicable continuing fund by contacting their dealer or by telephone toll free at 1-888-421-5111 or via internet at www.capitalinternational.ca or by accessing the SEDAR website at www.sedar.com;
(c) upon a request by a unitholder of a terminating fund for financial statements, the Filer will make best efforts to provide the unitholder with financial statements of the applicable continuing fund in a timely manner so that the unitholder can make an informed decision regarding the applicable merger;
(d) each applicable terminating fund and the applicable continuing fund with respect to a merger have an unqualified audit report in respect of their last completed financial period;
(e) the information circular sent to unitholders in connection with a merger provides sufficient information about the merger to permit unitholders to make an informed decision about the merger; and
(f) this decision will terminate one year after the publication in final form of any legislation or rule dealing with matters in subsection 5.5(1)(b) of NI 81-102.